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Viewpoint -- Export Processing Zones: Is Asia Still the Hotspot?

While EPZs are beneficial they are not a long-term strategy.

By Nancy A. Wood-Kouassi, Import Knowledge Group | Sep 10, 2007

American firms moving their factories to foreign countries in search of cheap labor and reduced taxes is not a new phenomenon. Perhaps less widely known, is these companies flock to Export Processing Zones (EPZ) within a selected foreign country. EPZ, a marriage between Industrial and Free Trade Zones, is a geographically restricted area typically unhampered by government intervention whether it is economic or social. They offer incentives such as low labor cost, refutably low safety regulations, employee benefit requirements, and in many instances, nonexistent corporate income and property taxes.

Most recently Daimler Chrysler has jumped on the bandwagon by transferring their plant operations to China. Opponents of EPZ argue the relocation of American companies to foreign countries causes a loss of American jobs. In the case of Daimler Chrysler an estimated 11.000 manufacturing jobs and 2,000 white-collar jobs will be eliminated. Assembly plants in Newark, Del., will be closed, as well as the Warren, Mich., truck plant and the St. Louis County, Mo., assembly plants.

Opponents of EPZs, also reference the exploitation of the native population citing lack of a minimum wage standards, poor working conditions, lack of employee benefits and rights. But done correctly, EPZ, is not a long-term economic growth plan for developing countries. From 1965-1990 eight nations, Japan, Hong Kong, Republic of Korea, Singapore, Taiwan, Malaysia, Indonesia and Thailand grew faster than all other regions in the world at an annual growth rate of 7-8% a year. A variety of factors contributed to this growth such as macroeconomic stability, equitable income distribution and an export orientated strategy in the form of Export Processing Zones.

EPZ have been highly successful in driving economic development in East Asian countries resulting in many other developing countries opening their own EPZ. But as EPZ should not be a long-term economic development solution for developing countries they should not be seen as a long-term profit making initiative for American industries. EPZ are continual evolving. In their infancy they are human capital based with very little spillover effects to the domestic economy in terms of foreign exchange earning, and employment income. However, done correctly, the inherent self-reliant nature of EPZ can be countered and it becomes a catalyst for growth as it did in Taiwan Kaoshiung EPZ.

The story of Taiwan's EPZ is a good example of how an EPZ should be run. They have been extremely crafty in manipulating successful results. Initially, foreign investment came in the form of labor intensive, light industries such as electronic and textile. As the economy developed, labor cost rose and this form of foreign investment diminished. However Taiwan foresaw this problem and poured the proceeds into educational programs, subsequently raising the literary rate, invested heavily into infrastructure, and terminated the monopolistic control government had on banking and finance. They also offered special incentives such as low interest financing and incentive schemes for high tech industries. This enable them to attract capital intensive industries such as machinery, steel, petrochemicals that offer the type of information and technology transfer they were seeking.

To date labor-intensive industries in Taiwan's EPZ are minimal. Many of the existing industries were forced to migrate elsewhere; in many cases traveling only a short distance to their developing neighbors like Indonesia, and China mainland. This bring forth the question, why do American firms still pay the tremendous expense of relocating and setting up stations in China and other developing Asian countries? These countries are very savvy at manipulating their laws and regulations to their own ends. And the rapid development of their economy makes the utility of relocating to this side of the world short lived.

Many countries offer the same benefits but are not as widely talked about. Kenya Export Processing Zone in Athi River is an example. Like their Asian counterparts they offer enticing incentive, such as a 10-year corporate income tax holiday, 10-year withholding tax holiday, exemption from VAT and customs import duties, 100% investment deductions etc. Relocating to a less prestigious location may actually contain less risk. Is Asia still the Hotspot? That's a question American companies should take a minute to ponder before jumping on the moving van.

Nancy Wood-Kouassi is an International Trade professional with specific experience in the Aviation, Textile and Automotive fields. Offering consulting services at Import Knowledge Group, in a wide variety of areas including customs brokerage, HTS classification, duty drawback, Free Trade Zones, research/marketing reports and other customs consideration that arise when shipping articles internationally. For more information on the author you can visit http://www.importknowledge.com